Greenspan's comments regarding the deficit are both sobering and long overdue. I hope the Republicans are listening but I am not confident. We basically finance the deficit by selling T-bills to large institutional foreign investors. That helps keep the dollar strong against other currencies which helps those nations keep their exports high, primarily China and Japan. A sinking dollar would make their goods being sold here more expensive. The problem is that they can't do that forever, especially with our deficit getting worse and worse and worse. At some point they will stop buying those notes unless they are offered with a higher rate of return which means higher interest rates all around. That, of course, means less capital available for financing everything from a new home to a new factory. Further, that increases the part of our deficit that is essentially interest payments. It is the samething that happens when you minimum monthly payment on your interest card goes up, it costs you more to carry almost the same debt. The whole mess can spiral. A slower economy due to tighter capital markets produces less tax revenue leading to a higher deficit requiring more borrowing to keep it afloat leading to an even tighter capital market. And so on.

The only way to fix this is to lower the deficit and that can only be done two ways: A) muster the political discipline to raise taxes and lower spending or a visit from the prosperity fairy, ie, an economy so prosperous that the increased tax revenue generated creates a surplus or close to it.

Some articles:
Fed Reserve Gov. Ed Gamlich on the Deficit
Greenspan on the Deficit

Gamlich says the way out is "fiscal austerity" for the United States. I don't see it happening.

Politically, this is up to the President to deal with. He has another 4 years, majorities in the Senate and House and a pocketful of political capital. He needs to get it done, no excuses. I don't expect any President to waive an economic wand and fix global economies the world over with nothing more than a "bippity-boppity-boo". However, what can be done must be done. Some sort of demonstration of political discipline would go a long way towards calming the growing fears over our deficit. Greenspan, not known for hyperbole, is right, the situation is growing "increasingly less tenable".

Greenspan is retiring after '05 - who cares what he thinks anymore!

From your mouth to any Republican's ears.

But...but...but...debt is good. Rich said so!


Anyone who thinks this is hard news hasn't been paying attention. If the next president doesn't rein in deficit spending, we're pretty much screwed...

Bah...trying to fix it would probably take forever and prove to be an exercise in futility anyway. Better to just let things go on as they are, let it collapse under it's own weight, clean up the rubble after a period of anarchy, and start all over again.

I sure wouldn't want to run for president in '08 since whoever wins will have to raise taxes. Of course Bush is already talking about the federal sales tax.

Federal WHAT??!!??

That is the type of "can't do" attitude that Americans are known for.

Of course you also have to take a look at the venue where Greenspan gave his speech - in Frankfurt at a meeting of the industrialized nations, with Europeans crying about the soft dollar. Greenspan played to the audience, by repeating basically the same things he's been saying for a year.

His admonition about the deficit is always laced with the with the disclaimer that he doesn't believe that the US is at risk due to its deficit, but that it's something to worry about. The real goal of his speech in Germany is to have Europeans focus on solving their problems and have China & Japan take some pain in the strengthening of the US$.

Right now, everyone is placing their problems at the feet of the US, and Greenspan simply reminded them that all future pain should be shared equally, and they shouldn't count on the US to intervene in the foreign exchange markets.

If you want to read into Greenspan's mind as to the message he's sending to the Republicans, it's the one in controling the expenditure side, not raising the revenue.